Moody's retains India's sovereign rating at Baa3

New Delhi: India's economic recovery is unlikely to be derailed by rising challenges to the global economy, higher inflation and tightening financial conditions, Moody's Investors Service on Tuesday said, affirming a stable outlook for the country's rating.

Moody's saw the Indian economy expanding by 7.6 per cent in the current fiscal compared to 8.7 per cent growth in the last financial year that ended on March 31. For 2023-24, it estimates a 6.3 per cent GDP growth. It rates India at Baa3, the lowest investment grade rating. In October last year, it revised upwards the rating outlook to stable from negative.

"The credit profile of India reflects key strengths, including its large and diversified economy with high growth potential, a relatively strong external position, and a stable domestic financing base for government debt," Moody's said in a note.

Principal credit challenges include low per capita income, high general government debt, low debt affordability and limited government effectiveness. "We do not expect rising challenges to the global economy, including the impact of the Russia-Ukraine military conflict, higher inflation, and the tightening financial conditions on the back of policy tightening, to derail India's ongoing recovery from the pandemic in 2022 (FY2022-23) and 2023 (FY2023-24)," it said. The stable outlook, it said, reflects its view that the risks from negative feedback between the economy and financial system are receding. "With higher capital buffers and greater liquidity, banks and non-bank financial institutions (NBFIs) pose much less risk to the sovereign than we previously anticipated, facilitating the ongoing recovery from the pandemic.

"While risks stemming from a high debt burden and weak debt affordability remain, we expect that the economic environment will allow for a gradual narrowing in the general government fiscal deficit over the next few years, avoiding further deterioration in the sovereign credit profile," it said. Moody's said it could upgrade the rating if India's economic growth potential increased materially beyond expectations, supported by effective implementation of economic and financial sector reforms that led to a significant and sustained pickup in private sector investment.

Effective implementation of fiscal policy measures that resulted in a sustained decline in the government's debt burden and improvements in debt affordability would also support the credit profile. However, the rating can be downgraded if weaker economic conditions and/or a resurgence of financial sector risks. "Slower growth than we project would contribute to a continued rise in the debt burden, which could weaken the sovereign's fiscal strength further and lead to a negative rating action," the rating agency said.